A Little History of Economics summary

The first school of economists formed in pre-revolutionary France, led by François Quesnay. Quesnay was a monarchist, but he had a radical notion: do away with taxes on France’s peasants and tax the aristocrats instead. Peasants worked with nature, given by God, and their products were the ultimate source of a nation’s wealth. France had been foolish, he thought, to tamper with their earnings.

Worse, France had bestowed special privileges on merchants, allowing them to organize themselves into guilds to protect themselves from competition. 

England’s new factories created vast wealth and privileges, but only for landowners and the capitalists who owned the factories. A diverse group of economists in the nineteenth century turned their minds to this new problem.

British stockbroker David Ricardo thought free trade would solve inequality. At the time, Britain had laws in place that banned cheap foreign grain, resulting in high grain prices. This made life more difficult for workers. Meanwhile, Ricardo showed, the laws further enriched the capitalists and landowners who profited from domestic grain. 

In the early twentieth century, the Russian revolutionary Vladimir Lenin put Marx’s ideas into practice. He and other economists hypothesized that imperialism, the European practice of taking over foreign territories for profit, had propped up capitalism longer than its natural life cycle. When Lenin overthrew Tsarist Russia in 1917, he set up the world’s first communist state: the Soviet Union, also known as the USSR. It would be, Lenin proclaimed, the enemy of imperialism. 

The USSR practically addressed a problem that would be central to twentieth-century economics: the role a government should play in the economy. The Soviet economy was subject to a system called central planning. That means the economy took direction from the government, not the markets. For instance, in the USSR, cars would be painted blue due to a decision made in the highest levels of government – not consumer demand. 

When the Great Depression hit the US in 1929, fortunes were lost overnight and 13 million Americans – about a quarter of the working population – were plunged into unemployment. Economists were faced with an urgent new question: How could the world’s richest country be experiencing such acute poverty? The British economist John Maynard Keynes, whose influence endures even today, believed that the Great Depression was the result of governments failing to respond properly to early signs of recession. When the Depression hit, worried people stopped spending and started saving. When businesses followed suit, things only got worse. The economy wasn’t going to right itself, Keynes believed, so the government had to step in. 

The key message here is: In the mid-twentieth century, political events inspired economists to develop theories of government involvement.

We’ve seen how Keynes ushered in new thinking about government’s role in economics – he believed that government should preside over the economy, taking steps to enact change. This became known as macroeconomics. But what about the small decisions people and companies make every day, which cumulatively make up an economy? Beginning around World War II, economists started to study everything that goes into these small decisions. This is known as microeconomics.

But during the Cold War, it became clear that one political decision-maker’s actions could decide the economic fates of many. To help decision-makers choose a course of action based on strategic factors and predictions of an enemy’s behavior, a group of American economists and mathematicians developed what’s called game theory. Game theory turned out to be as relevant to geopolitics as it is to individuals and firms. 

In the decades after World War II, Keynes’s ideas of government involvement in the economy were put to the test. A group of economists, the young Keynesians, developed practical applications of Keynes’s theories. Their ideas gained currency, and in the 1960s President Kennedy adopted a Keynesian policy of tax cuts, with the goal of jump-starting the economy by putting more money in the hands of consumers. 

The policy was a success, and for a while, everybody was convinced – even the Republican party, which was traditionally skeptical of government interference. But by the late ’70s, economists began to wonder whether too much government spending was causing a rise in inflation. Perhaps the good economic performance of the 1960s wasn’t due to Keynesian policies at all.

Before the 1980s, bankers were stodgy types, typically stuffy men in tweed suits. In the 1980s, though, a new breed emerged: brash, arrogant cowboys, brazen with their risk-taking. They engaged in speculation, making guesses about what a commodity such as wheat or oil would cost in the future, then buying a lot of it based on that guess. When their guesses were right, they then sold the commodity for a profit.

Sometimes that commodity was currency. Currency speculators like George Soros made money by guessing how a country’s currency would fare over the course of weeks or months. And it wasn’t just a couple of bucks here and there: in 1992, Soros made a profit of £1 billion after his speculative behavior destabilized the Bank of England.

When he was a boy, the Indian economist Amartya Sen was witness to horrific violence between Hindus and Muslims in Bangladesh. This led him to pursue a career thinking about the reasons behind inequality. Poverty, Sen believes, is about more than just material goods. It’s about a lack of capabilities that open up possibilities for advancement – a lack of transportation or education, for example. According to Sen, developing society is more about expanding peoples’ capabilities than it is about economic development. 

Sen helped the United Nations develop the Human Development Index, which measures income alongside other metrics like life expectancy and literacy. To Sen, economics is about the various things people need to live happy lives – not just money.